A fiscal deficit is a shortfall in a government's income compared with its spending. The government that has a fiscal deficit is spending beyond its means.
A fiscal deficit is calculated as a percentage of gross domestic product (GDP), or simply as total dollars spent in excess of income. In either case, the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall.
Constituents of Income of Government:
It has two components - revenue receipts and non-tax revenues.
Revenue receipts of the government include Corporation Tax, Income Tax, Custom Duties, Union Excise Duties, GST and taxes of Union territories.
Non-tax revenues include Interest Receipts, Dividends, and Profits, External Grants, Other non-tax revenues and Receipts of union territories.
Constituents of Government Expenditure:
Govt.'s expenditure includes - Revenue Expenditure, Capital Expenditure Interest Payments and Grants-in-aid for the creation of capital assets.
How does a government meet its fiscal deficit?
Governments typically finance their deficit by borrowings. There are many avenues from where a government can borrow — that is from banks, public institutions, public and from overseas investors.
Fiscal Deficit in India:
Finance minister Nirmala Sitharaman in her Budget 2020 speech proposed reducing fiscal deficit by 30 basis points to 3.5% of GDP in 2020-21.
The latest budget targets a narrower deficit, prolonged weakness in nominal GDP Growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilize.
According to the data released by the Controller General of Accounts (CGA), the government's fiscal deficit touched 132.4% of the full-year target at December-end mainly due to the slower pace of revenue collections.
Sitharaman quoted that the government’s revenue generation will likely improve due to the closing of loopholes in the indirect goods and services tax scheme. Disinvestment plans for struggling state-owned assets are also expected to go through.